Loan loss provisions, accounting constraints, and bank ownership structure

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https://www.sciencedirect.com/science/article/abs/pii/S0148619514000794

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https://doi.org/10.1016/j.jeconbus.2014.12.003
 http://hdl.handle.net/11603/19086

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2014-12-31

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journal articles preprints
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Eliana Balla and Morgan J.Rose, Loan loss provisions, accounting constraints, and bank ownership structure, Journal of Economics and Business Volume 78, Pages 92-117 (2015), https://doi.org/10.1016/j.jeconbus.2014.12.003

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Abstract

We examine bank-level changes in the relationship between earnings and loan loss provisioning, a measure of earnings management, following the tightening of accounting constraints associated with the SEC's 1998 SunTrust Bank decision. By exploiting both temporal variation in the regulatory environment and cross-sectional variation in bank ownership structure, we find evidence that shortly after the SEC action, the relationship between earnings and provisions weakened for publicly-held banks but not for privately-held banks, consistent with reduced earnings management among publicly-held banks only. This difference does not persist over time, with evidence indicating a weakening of the relationship for both ownership types.